'India can sustain 6-8% growth rates up to 2025'

September 21, 2009 16:07 IST

With a year of economic downturn behind us, Stuart Corbridge, professor of development studies at London School of Economics, expects that the world might suffer a public sector downturn next year. However, he is optimistic about Indian prospects.

In a conversation with Devika Banerji, Corbridge says that the problem with India's growth story has been its inability to reduce poverty to significant levels. Excerpts:

As economies like Germany, the US and France have come out of recession, do you see the global economy recovering?

I am a little nervous. I believe that we have been lucky, it could have tipped over to something worse. If you take the case of the US and the UK, there is a massive building up of deficits which I think was necessary. All that money has shown signs of recovery, so people are optimistic in that respect.

However, the recession in the West has largely been a private sector phenomenon, but now the pressure will be on the public sector. Government books will have to balanced next year and taxes will go up. So, I fear a public sector recession next year and if it happens too soon, it might even drag the recovering private sector along with it. So, I am apprehensive.

What should India learn from the crisis?

There are a number of answers to this. Well, the way forward for India would be not to believe in the concept of free markets. Markets always need to be underpinned by functioning institutions. They have to be regulated. There are informational symmetries, there are externalities.

The idea that we can simply open up markets is a self-defeating idea. It will engender political opposition because it will bring extreme volatility. I think the recession in the western world is a result of refusal to regulate some industries like real estate and finance.

In case of the UK, the economy has become unbalanced because we lack a manufacturing base and are heavily dependent on finance capital.

In the long run, do you think an average Indian growth rate of 7-8 per cent is sustainable?

I think sustaining the rates of 6-8 per cent growth a year up to 2020-25, except some exceptional years, will be possible. The main reason would be that India has invested so little in relative terms in human capital.

Once investment comes into infrastructure, education and healthcare, we will see the productivity of workers in India increase significantly.

Second, this is the time India should reap the benefits of its demographic dividend. Most of the countries, including China, have already done that and so India has more potential. This, of course, presupposes that jobs will be created in India.

The worst-case scenario would be lots of skilled unemployed labour, which might challenge growth. But I am optimistic about the Indian growth rate for the years to come, provided you neutralise the political tensions.

You seem to be very optimistic about India's growth? Has the growth story been disappointing in some way?

Well, the problem is that the growth has not translated into reduction of poverty in the scale that we had expected, at least not in the eastern parts of the country. One per cent increase in the rate of growth in China has resulted in around 1 per cent reduction in poverty.

However, in India it is half of this. Therefore, the growth story becomes clogged up. The reasons are that some people are unaffected with the growth taking place; they are not in the labour market, and are discriminated and left out of the system. All of this is holding the productivity of the country and making the growth less benign.

What then would be the way forward for India?

It's interesting that India has achieved such high rates of growth with a majority of the population living in rural areas. I would expect an enormous migration of people to urban areas in the next 20-30 years, so to say. Then you will need space for new cities to come up to accommodate such migration. You will have to think about cities double the size of Delhi or Mumbai.

India and China have often been compared against each other as far as economic development is concerned. Do you endorse that India has paid an economic penalty because of a democratic set-up?

The India-China comparison is a very interesting one. A crude way to put it would be the classic case of the tortoise and the hare, with the tortoise catching up.

You can solve some coordination problems in a rational authoritarian state set-up like in China, but I will still maintain that a democratic set-up is more suited for a consistent growth rate in the long run. It is very difficult to argue that India has paid an economic penalty because of a democratic set-up.

India has achieved pretty respectable rates of growth since 1980 and good growth rates since 2000. And to my mind, along with this, a lot of things have been done around the 'dignity' agenda. A lot of empowerment has taken place, both at the Centre and at the state level, and going ahead, India will reap the benefits of these.

You have studied the social sector in India. According to you, is it a right time for India to move away from the public distribution system for more qualitative social sector schemes?

The key issue in a public distribution system is that of leakages. The results are region-specific, and some systems that work for Kerala may not work for Bihar. Currently, the focus should be on making these schemes efficient and identifying the right beneficiaries. In more time, you might hope to move away from public distribution systems.